Pensions: The Importance of Retirement Planning
This week is Pension Awareness Week in the UK; a week for highlighting the importance of pension and retirement planning, and why taking pension advice sooner rather than later is beneficial for everyone.
Today we are introducing the New State Pension and explaining why private pension planning is also required. Throughout this week we will be writing on other topics that are commonly encountered.
The New State Pension
The new State Pension is the foundation of a retirement income for most of the UK population.
In 2023/24, the new State Pension is up to £203.85 per week (up to £10,600.20 per year) and is paid from the State Pension age (currently 66, shortly rising to 67) onwards. The amount of State Pension payable is based on your National Insurance Record, as shown in the figure below. Individuals require at least 10 qualifying years of National Insurance Contributions to receive any State Pension and a full State Pension is paid to individuals with 35+ qualifying years.
Since 2010, the amount of new State Pension increases each April according to the Government system called “the triple lock”, to protect State Pension payments from the effects of inflation. During the Coronavirus pandemic, the Government suspended the triple lock, but the lock has been reinstated. In April 2023 the State Pension increased by 10.10%!
You can check your National Insurance Record online at – Check your National Insurance record – GOV.UK (www.gov.uk). There is also further information about qualifying years, National Insurance credits and voluntary National Insurance Contributions.
A State Pension forecast can be requested anytime using the BR19 form, available at – Application for a State Pension forecast – GOV.UK (www.gov.uk). Obtaining a forecast is highly recommended as a precursor to seeking advice on retirement planning, as it will give you the foundation for building your retirement financial plan.
Is the New State Pension enough?
An annual study by Which?, updated in July 2023, reveals that the State Pension represents only a portion of the income required to live a “comfortable” or “luxury” retirement, and only just covers the income required to live an “essential” retirement.
The Which? study indicates that a two-person household will require approximately £19,000 per year to live an “essential” lifestyle, £28,000 per year to live a “comfortable” lifestyle and £44,000 per year to live a “luxury” lifestyle. A single-person household will require £13,000 per year for “essential”, £20,000 per year for “comfortable” and £32,000 for “luxury” retirement.
The State Pension simply won’t be enough for most people in retirement, so private pension funding is imperative.
Defined-Benefit vs. Defined-Contribution Pensions
Private pensions broadly fall into one of two categories: defined-benefit or defined-contribution:
- Defined-benefit pensions pay a guaranteed income in retirement. Employers and employees make contributions to the pension scheme during membership and the terms of the scheme determine the pension to be paid. This pension is normally based on the salary and number of years in the scheme.
- Defined-contribution pensions do not pay a guaranteed income in retirement. Individuals make contributions to the pension scheme during membership. These contributions are invested and the member builds up a total pension pot. At retirement, the member has several options for taking income from the pension.
Defined-benefit pensions are increasingly rare for new members, except for those working in the public sector, but many older workers may be members of schemes from previous employment. Defined-contribution pensions are the most common pensions set up by employers for their employees, or by individuals for themselves.
In 2012 the Government launched an initiative known as auto-enrolment to encourage individuals to save more for retirement. Employers are obligated to enrol their staff into a workplace pension scheme and ensure sufficient contributions are made. Since 2019, broadly, the total minimum contribution is 8.0%, with at least 3.0% of the contribution to be made by the employer. Workplace pension contributions should be displayed on your payslip, and you should also receive regular statements from the pension provider.
Workplace pensions setup in response to auto-enrolment are commonly invested in default collective funds which may or may not be suitable for your current and future circumstances. It is important to review the pension to ensure that the investments are suitable for you.
Personal pensions have been widely available for many years and can be arranged by anybody who wishes to save for retirement. Savings are invested by the pension provider and depending on the provider there may be multiple ways to take the funds in retirement.
Personal pensions are set up directly with a provider and contributions are made directly. The contributions are treated in the same way as contributions made through a workplace pension and can be made before or after tax is deducted, which affects eligibility for tax relief at source. Investors choose their own investments, often with little input from the provider on the suitability of the selection.
How much might I need in private pensions?
According to the Which? study**:
- A two-person household would need a pot of around £115,000, alongside two full State Pensions, to produce an annual income of £28,000 for a “comfortable” retirement via pension drawdown
- A single-person household would need a pot of around £173,000, alongside one full State Pension, to produce an annual income of £20,000 for a “comfortable” retirement via pension drawdown
** The Which? Study figures are based on income drawn over a period of 20 years, with investment growth at 3.0%, inflation at 1.0% and charges of 0.75%.
How can Carpenter Box Financial Advisers help me?
At Carpenter Box Financial Advisers, we can help you quantify your retirement goals and objectives and develop a strategy to work towards them. Your financial plan can be personalised to your current and expected future circumstances and will include investments which are suitable for you. Our ongoing review services will ensure your plan is continually tailored to your circumstances and adjusted to factor in any planned (or unplanned) life events.
Our team are highly experienced at analysing and evaluating existing pension products and determining whether they are likely to facilitate your retirement goals. We continually review our panel of pension providers to ensure any new recommendations we make are to the strongest providers across the entire pension market.
A pension is a long-term investment not normally accessible until age 55 (age 57 from April 2028 unless the plan has a protected pension age).
Contributions to personal pensions and workplace pensions are typically invested in market-based funds. The value of your investments (and any income from them) can go down as well as up which would impact on the level of benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change.
You should seek advice to understand your options at retirement.
|National Insurance Years||State Pension Amount (Weekly)||National Insurance Years||State Pension Amount (Weekly)||National Insurance Years||State Pension Amount (Weekly)|
Table 1. The new State Pension amounts payable in 2023/2024, depending on the number of qualifying years of National Insurance Contributions.